Finance and Capital Structure Flashcards
What to pay attention to with yield?
TIME APPORTION non-annual yield back up
Dividend yield is payout over what?
Market value
Not book value
What risks does WACC consider?
At te start of the wacky races the drivers sees the risks and says ‘fuck’s sake’ in his stupid car
- Financial risk (of company)
- Systematic risk (of project)
Implications of increase in WACC
- More cost, so less company value
- But, potentially more value if +ve NPV project
What should you use if you can’t use WACC?
APV
Which uses the UNGEARED BETA
How to calculate TERP
( MV atm + issue proceeds + PROJECT NPV ) / No shares AFTER issue
Price after issue (ex-rights price!)
Value = TERP - Price (to buy)
Wealth impact = Wealth before & after
ARR =
Accounting profit / Non-current SHAREHOLDERS’ FUNDS
Shareholders’ funds are Equity AND Retained earnings (less earnings retained in the year)
When will WACC not be appropriate?
- Different risk: So different beta so different WACC
- Specific financing i.e. not using source-weighted capital
So as to get it done nice and quickly, what things should you seek out when calculating a TERP?
- **Number **of shares
- Price of shares
(a. Before, b. during and c. after)
In a rights issue, what is the rights price?
The ACTUAL PRICE of the new shares issued
Will the actual share price after a rights issue end up being the TERP?
Not necessarily. It won’t when, e.g.:
- All rights not taken up
- The proceeds aren’t invested in +ve NPV projects
- There was already a +VE NPV project included in the TERP
With debt, what not to mix up?
YIELD and COST
Yield is RATE(…)
Cost is (1-T) x Yield
How to work out (required) issue price (of a redeemable debenture)?
MARKET VALUE (at issue)
Because what you issue it for, assuming people pay for it then, MUST BE the market value at that time
I.e. PRESENT VALUE
I.e. PV(…) formula
How can you calculate the market value of e.g. debt when you need a particular rate of return
PRESENT VALUE ( =PV(…) )
If you are told that some new debt has to have the same rate of return as some other debt, what is that the same as saying?
The ROR of the new debt = the YIELD of the old debt (and vice versa)
I.e. Debt YIELD = RATE OF RETURN
What to remember about ther WACC for an existing company considering a new investment?
- Kd / Ke of the NEW INVESTMENT ONLY (as expected, when appraising the effect of the cost of the capital required for that actual investment)
- MVs of EXISTING COMPANY (Not as you would logically expect, *because assuming the additional capital is negligible, so would be unnecessary effort)
What may diversification change?
Systematic business risk
I.e.
Beta
How do you find the systematic risk of a new market?
Take the beta of the new market
How do you eliminate financial risk?
Degear
Because financial risk = risk from financing i.e. capital structure i.e. debt & equity
What will increased systematic business risk do to cost of capital?
‘Higher cost of debt because of the higher systematic business risk’
What is the overriding objective of a company?
To generate long term wealth for the shareholders
However, this can only be done by predicting behavior of other main stakeholders
Main stakeholders in a business
A group of stakeholders wearing suits and holding their steaks is attacked by a giant radioactive spider, luckily one of them rips off their suit to show he is Super Man, and Super Man enjoys lifting giant radioactive spiders
- Shareholders
- Managers (own objectives (pay/security/power so agency problems)
- Employees (& unions) (Morale & Job security)
- Lenders (& Creditors)
- Government (Laws AND tax)
- Regulators
- Society (E.g. environment)
ESG
Non-financial factors that are also important
Even for 100% profit-focus, affecting invest R&R
Environmental: Frog’s resounding croak
Fines, Reputation, Claims (Legal)
Social: Hippogriffs rarely play badminton during daytime
H&S, Rights (workers’), Pay, Benefits, Diversity (& equal opps)
Governance: S&M
Structure (of board) and Monitoring (of directors)
Bad governance leads to DTF: Decisions (bad ones), Taking risk, Fraud
